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Congress Eliminates OPPS Payments for Many New Hospital Off-Campus Outpatient Departments And Promotes Site-Neutral Payment Policy – Section 603 of the Bipartisan Budget Act of 2015
October 30, 2015

Background and Introduction

In its search for savings to pay for increased defense and non-defense discretionary spending caps and to reduce a 50% increase in Part B premiums on some beneficiaries, Congress once again looked to Medicare payments to hospitals.  In addition to another extension of Medicare sequester, now through fiscal year 2025, Congress is establishing new policy to reduce reimbursement at certain off-campus hospital outpatient facilities.  Section 603 of the Bipartisan Budget Act of 2015 (BBA 2015), adds 42 U.S.C. § 1395l(t)(21) to the Medicare Act, and is projected to reduce payments by $9 billion over the ten-year budget window.  

Off-campus hospital outpatient departments that do not fit within Medicare's regulatory definition of a dedicated emergency department and have not billed for services under the Medicare outpatient prospective payment system (OPPS) as an outpatient department “of a provider” prior to the date of enactment will, as of January 1, 2017, no longer be eligible for reimbursement under OPPS.  The legislation will become effective upon signature by the President, which is expected on November 2, 2015.  Off-campus hospital outpatient departments that are not exempt from this limit will be paid under an applicable Part B payment system such as the physician fee schedule or the ambulatory surgery payment systems, provided the applicable payment requirements are met.  These fee schedules typically pay for such services at lower rates than OPPS.

Hospitals that are currently developing off-campus outpatient departments through construction or acquisition are at significant risk (if not a certainty) that services in those units will see payments under Medicare, and programs that base payments on Medicare rates, fall significantly.  Such hospitals need to carefully consider whether those projects will result in outpatient departments subject to the new payment limit.

We explain the new system briefly below and identify several ambiguities that will require additional legislation and/or rulemaking by CMS.  Hospitals also need to be aware that Congress has severely limited the ability of providers to challenge a CMS determination that a particular off-campus outpatient department of a hospital is subject to this payment limitation, making such off-campus determinations not subject to administrative or judicial review.  As a result, clarification of this new rule through amendment and/or rulemaking will be of primary importance to the industry. HLB will be diligent in our involvement on behalf of the industry to clarify how this new system will be applied to off-campus, hospital outpatient departments.

In addition to the simple budgetary desire to achieve savings, Congress enacted section 603 in response to perceived and real concerns by Medicare, MedPAC and others, that payments for Medicare services (both by the Medicare program and beneficiaries through increased copayments) were increasing as a result of the growing trend in  the conversion of freestanding physician practices and clinics into hospital outpatient departments, with challengers speculating that this increase in payments was not proportionate with or otherwise tied to either greater resource use or the improvement in the underlying quality of the services in the hospital outpatient setting.  Congress and the Administration have been looking at various tools to make payments in various different contexts and settings site neutral when the underlying services are not differentiated in meaningful ways among the sites that provide the service.  In moving to more site neutral payment systems, there is a shift away from payment based on the location where the services are provided and toward payment based on the nature of the services provided.  In part, the goals with site neutral payments are to incentivize the more expensive sites to operate more efficiently so they can survive under a reduced payment model or to move services to the least expensive site that can effectively provide the service.

Mechanics of the New System

1.  What is an Off-Campus Hospital Outpatient Department?

The new payment limit applies only to “new” (enactment date and later) off-campus hospital outpatient departments, excluding dedicated emergency departments.  As originally introduced, section 603 would have limited payments to all “new” off-campus hospital outpatient departments, except for emergency services identified by HCPCS codes 99281-85.  The section was amended before House approval to delete the reference exempting specific HCPCS codes and to include a broad exemption for all services provided in a dedicated, off-campus emergency department of a hospital, as defined in existing regulations. 

Section 603 defines off-campus by reference to how CMS defines a hospital campus in the Medicare regulations at 42 C.F.R. § 413.65(a)(2):

Campus means the physical area immediately adjacent to the provider's main buildings, other areas and structures that are not strictly contiguous to the main buildings but are located within 250 yards of the main buildings, and any other areas determined on an individual case basis, by the CMS regional office, to be part of the provider's campus. 

The statute extends just the distance portion of this definition to remote locations of a hospital.  Remote locations of a hospital are defined in the same Medicare regulation as follows:

Remote location of a hospital means a facility or an organization that is either created by, or acquired by, a hospital that is a main provider for the purpose of furnishing inpatient hospital services under the name, ownership, and financial and administrative control of the main provider, in accordance with the provisions of this section. A remote location of a hospital comprises both the specific physical facility that serves as the site of services for which separate payment could be claimed under the Medicare or Medicaid program, and the personnel and equipment needed to deliver the services at that facility. The Medicare conditions of participation do not apply to a remote location of a hospital as an independent entity. For purposes of this part, the term "remote location of a hospital" does not include a satellite facility as defined in §412.22(h)(1) and §412.25(e)(1) of this chapter.

            In the context of these definitions, off-campus departments will likely be considered to include any department of a hospital that CMS determines is not located on the main campus or within 250 yards of a remote location of a hospital, with the statutory exception noted above for dedicated emergency departments.

2.  What Off-Campus Departments Are  Exempt From The Payment Limit?

While section 603 does not use the term “new,” it does provide a grandfathering provision that is temporally based for certain hospital outpatient departments:

[T]he term ‘off-campus outpatient department of a provider’ shall not include a department of a provider (as so defined) that was billing under this subsection with respect to covered OPD services furnished prior to the date of the enactment of this paragraph.

Clearly, any off-campus, outpatient department of a hospital (other than a dedicated emergency department) that opens and does not bill under OPPS on or after enactment will be subject to this new payment limit unless Congress and the Administration are compelled to provide flexibility to address construction in progress, acquisitions that did not close before enactment or other similar scenarios. 

But certain ambiguity in Section 603 may create a challenge for existing outpatient departments as well.  For example, what does billing as a department of a provider mean in this context?  If post enactment a hospital acquires another hospital and the acquired hospital becomes a remote location, operated under the acquiring hospital's provider agreement, will the off-campus departments of the acquired hospital be treated as “a department of a provider” that was billing under OPPS before the effective date of the section?  It was a "department of a provider" and a provider was billing for services rendered at its off-campus location pre-enactment, but it was a different provider under a different provider agreement than the provider that is looking, post-acquisition and post-enactment, to continue to bill for services rendered at the off-campus department under OPPS.  Clearly, if an existing provider and its off-campus outpatient departments are acquired with the provider agreement accepted by the buyer, and no merger into a different provider number occurs, then the grandfathering should survive.  We do not think it is reasonable to interpret the legislation to reach a different result if, instead of retaining the acquired hospital and outpatient departments as freestanding, a buyer accepts assignment of the provider agreement and elects to consolidate the acquired hospital and outpatient departments with an existing provider. It does not seem that Congress intended for the decision, in a hospital acquisition context, of whether to retain the hospital as a freestanding hospital or to merge it with an existing hospital to dictate whether the payment limit would apply to the hospital's off-campus outpatient departments. However, the legislation is not clear on this point.

There are a number of different situations and permutations that the grandfathering language also does not address and that could be implemented in a manner that is unreasonably detrimental to hospitals.  For example, what happens if an existing hospital outpatient department is operated in a physical plant that is outdated and a replacement center is built post-enactment?  Would the payment limit apply to the replacement center once it is opened?  What if a grandfathered off-campus outpatient department expands or modifies its services to better serve the needs of its community?  Will the off-campus outpatient department continue to be grandfathered, even if the services it provides change or expand?  It is critical, given this ambiguity and uncertainty, for interested parties to work with CMS and their legislators to obtain clarity and resolve these issues in a way that does not penalize existing hospital arrangements or arrangements under development at the time this significant change was enacted.  Unfortunately, as drafted, any unsatisfying determinations by CMS applying this new rule to specific hospital determinations is not likely to be appealable.

3.  What Will A Hospital Be Paid for Non-Exempt Off-Campus Hospital OPD Services On And After January 1, 2017?

Items and services furnished by an off-campus hospital outpatient department that is not exempt from the payment limitations would no longer be eligible for payment at Medicare OPPS rates. Payment could be made under other Medicare Part B payment systems including the Medicare physician fees schedule (PFS), the ambulatory surgery center (ASC) payment system, or the clinical laboratory fee schedule (CLFS) provided the applicable payment requirements are satisfied. The statute is unclear about the method and manner in which hospitals will be paid for services rendered in non-exempt off-campus outpatient departments as of January 1, 2017.  We believe CMS rulemaking will be necessary to fully flesh this out, including, for example, to address whether hospitals with such non-exempt off-campus departments will need to obtain separate enrollments or Part B billing numbers for these sites.   

Implications for Hospitals and Action Steps 

        Virtually the entire hospital industry was caught off guard by the adoption of this provision and its immediate implementation.  There is no question that many efforts at expansion within the industry will be affected by this section.  Hospitals need to carefully consider existing construction and acquisition plans and whether such projects when completed will continue to qualify for OPPS payments beginning on January 1, 2017.  While there may be some latitude for CMS to determine whether a particular service is provided on a hospital’s main "campus," once it is determined that an outpatient service is off-campus, Section 603 provides virtually no flexibility and its limited grandfathering is unclear and ambiguous. 

            Providers will need to work closely with CMS and their legislators to amend the existing law for clarity and develop a rational regulatory framework that satisfies Congressional intent and concerns.  In this regard, we would anticipate that CMS would look for factual support for the need to clarify or enhance the grandfathering (including, for example, evidence and documentation that a transaction was at an advanced stage as of the date of enactment and might be unable to proceed if subject to this new payment limitation). We have been actively involved during the last week in this process and look to help to provide clarity going forward.

            If we can provide help in any way please contact John Hellow, Hope Levy- Biehl and Stacie Neroni in Los Angeles at 310.551.8111; Bob Roth, Marty Corry and Bill Eck in Washington, D.C. at 202.580.7700; and Steve Lipton and Matt Clark in San Francisco at 415.875.8500.

For media inquiries, please contact Barrett McBride at bmcbride@health-law.com or 916.456.5855.